As announced in last 2 week, all BIG Four's are raising its variable mortgage rates between 15-20 basis points effective from November. This latest increase has caught mortgage customers by surprise especially as the pattern of interest rates is down and not up.
Banks blamed the rate increase on the higher cost of new capital requirements, which will be introduced from 1 July 2016, that will cost banks possibly tens of millions in additional funding costs.
The market is speculating other lenders will follow, however given the next RBA board meeting is only 2 weeks away, there’s a chance the other lenders will wait for the RBA to make their move first. This way, the other banks will simply hold onto the rate decrease!
Whichever way you look at it, the outcome is the same. A higher variable rate for mortgage customers.
What should you be doing right now?
For starters, don’t panic! Interest rates will move up, down and sideways. It’s all part of the cycle.
If you’re concerned about mortgage rates increasing and you can’t afford even a small rate increase, then fix your interest rate as an insurance policy. But before you rush off and ask for a fixed rate mortgage, here are the pros and cons which you need to consider.
A fixed rate home loan has the advantage of “set” repayments for a predetermined period (i.e. the fixed term) which is an excellent strategy if you want certainty for your cash flow commitments.
However there are also disadvantages which you need to be aware of before you make a fixed decision.
1) Will I be selling my property within the next few years?
2) Will I want to access my equity for renovations or to invest in more property to create wealth?
3) Will my bank/lender allow me to access my equity if I’m on a fixed rate loan?
4) Do I regularly make extra repayments into my home loan?
5) Do I have a higher than average household income?
6) Am I ahead of my mortgage term and am I likely to redraw?
There are many other issues to consider however the above are the most common issues which come up from my experience.
Fixing your rate has the ultimate benefit of achieving “certainty” with your mortgage repayments, however breaking a fixed rate loan can be costly as well as removing flexibility and control.
Fixed rate home loans are less flexible than variable as they generally limit the amount of extra repayments you can make, and redraw is not available (with most lenders). Also if you want to refinance to a better home loan deal, sell the property, or you want to access the equity built up, then again breaking a fixed rate home loan can be very costly as the bank/lender will pass onto you the economic cost they incur.
Before making any decision I highly recommend a chat with us to determine if fixing your loan(s) is the right action for you to take. A few minutes on the phone may save you a lot of cost and hassle down the track.
It’s difficult to cover all the issues relating to this topic in one newsletter so please feel free to contact us for a confidential discussion if you’re not sure what this means for you or what you should do. If easier just drop us an email.